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OCTOBER 25, 2012

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A social and economic system where the individuals are free to own the means of production and maximize profits, and in which the resource allocation is determined by the price system. As on date, no country is purely capitalist as everywhere the state owns some means of production and the price system is tinkered by regulation and market inefficiencies.  In fact, capitalism, despite its drawbacks, has delivered enormous increases in living standards over the past two centuries.





A barometer of the capital owned by the shareholders of a financial institution vis a vis the amount lent by it. Regulatory bodies set minimum capital requirements for institutions like banks. These requirements can be reserve asset ratios, a minimum proportion of liquid assets. For banks, these require­ments are aimed at preventing systemic failure and instability (prudential regulations).



Most Indian banks suffer from a problem of poor capital adequacy ratio. Therefore, they are in the process of shoring up their capital  base in line with Basel Convention requirements, to which India is a signatory.







Expenditure on fixed assets (plant and equipment), acquisitions of other businesses and expenditure on current assets (e.g. stocks). To be distinguished from revenue expenditure, which refers to the money spent on recurring heads (electricity bills, salaries, repairs etc.).






The market for long-term loanable funds as distinct from the money market, which deals in short-term funds.



The capital market is increasingly becoming global and, in any country, means all those institutions that match the supply and demand for long-term capital e.g. the stock exchange, banks and insurance compa­nies. All advanced countries have highly developed capital markets, but in developing countries, the absence of a capital market is an obstacle to the growth of investment








A group of producers / sellers that controls prices by restricting output and competition. Such groupings tend to harm the consumer by manipulating prices and supply. Otherwise known as an oligopoly e.g. cement industry, soft drinks and domestic airlines in India.


Cartels are illegal in most countries including India. To check cartelization, the government has set up a special body called the Competition Commission of India. Cartels tend to be unstable because a single member can profit by undercutting the others, while price-fixing stimulates the development of substitutes. The most prominent example of an international cartel is the Organization of Petroleum Exporting Countries (OPEC). 



A bankers' bank and lender of the last resort (e.g. Reserve Bank of India). The central bank is responsible for monetary management, issue of currency and controlling the credit supply in the system. Central banks typically execute policy by setting short-term interest rates which they control by establishing the benchmark interest rates and by open market operations. They also issue currency and maintain a suitable exchange rate of the domestic currency vis a vis other currencies. Some major Central Bnaks are: Federal Reserve Bank in the USA, Bundestag in Germany and Riksbank in Sweden.


Central banks have a vital role in economic management. In many countries, the central bank supervises and regulates the commercial banks and other financial intermediaries.




Certificates of Deposit are short-term borrowing instruments issued by commercial banks (say 91 days) and traded in the money market. They carry an agreed upon coupon rate i.e. interest rate between the bank and the lender.




An order written by the drawer to a commercial bank to pay on demand a specified sum to a bearer, a named person or company. Although still quite important, the use of cheques is being replaced gradually by other forms of money transfer (like RTGS, NEFT etc), credit cards and electronic payments systems. A bearer cheque can be encashed by its bearer across the bank counter while a crossed cheque can be credited into one’s bank account only.





An economy having little or no external trade, as opposed to an open economy, which has a high proportion of exports and imports. In today’s globalized, interdependent trade environment, it is almost impossible to find such a system. Almost every economy has some degree of openness attached to it.



An investment trust or fund management company which raises and manages a fixed amount of money from the investors. Practically speaking, there are very few closed-ended funds in India except may be Fixed Maturity Plans.



The sum total of all government funds together. It includes all government revenues, loans raised, and recoveries of the loans granted. All government expenditure is incurred from the Consolidated Fund and no amount can be withdrawn from it without parliamentary approval.





A fund for meeting emergencies when the Government cannot wait for parliamentary approval. The Government subsequently obtains such approval for the expenditure made earlier. The amount spent from the contingency fund is returned to the fund later.






A promissory note issued by a manufacturing company and traded in the money market. A way of raising short-term money for working capital needs. Typically, the plant and machinery are kept as collateral to raise the debt.



A loose term used to reflect a nation’s ability to grow successfully, and to maintain its share of world trade. Though comparative tables of national competitiveness are regularly produced by reputable business authorities, the term has never impressed academic economists.


A term coined by Thorstein Veblen to identify that ostentatious personal expenditure which satisfies no physical need but only a psychological need for esteem. Goods may be purchased not for their practical use but as ‘status symbols’ and to ‘keep up with the Joneses’. For example, the big fat Indian marriages typically involve a lot of conspicuous consumption.






A currency is said to be convertible if it can be exchanged freely for another currency or gold. India shifted to a system of Full Convertibility of the rupee on Current Account to improve exports.



The inflation caused by a rise in the cost of goods and services. Such price rise may arise abroad and be transmitted through costlier imports of raw materials and then be fed by higher wage costs as workers try to prevent inflation eroding the real value of wages.


Cost increases may also arise domestically from companies trying to increase profits and / or employees increasing their earnings. The cost-push argument for inflation is traditionally held to contrast with demand-pull inflation and has been associated with different policy implications. However, cost push alone cannot cause sustained inflation for long without sufficient monetary growth to support it.




An additional import duty imposed on a commodity to neutralize the reduction in its price due to an export subsidy in the country of origin. 




A plastic card with the holder's name and account number and the expiry date printed / embossed. Usually, smart cards contain account information in a microchip and can validate the holder’s personal identification number (PIN). Purchases up to a prescribed limit are allowed on credit upon purchase authorization on the voucher.  The vendor recovers amount from the card issuer and the purchaser pays the issuer on receipt of a monthly statement. For most cards, the purchaser has the option of paying a minimum amount and settling the account in installments, plus interest.

A debit card works similarly but the holder's bank account is debited immediately through Electronic Funds Transfer at a Point of Sale. Credit cards, popularly referred to as ‘plastic money’, are issued by banks.




The process by which a rise in government borrowing displaces spending. If a government runs a huge fiscal deficit, like in India, it tries to finance the deficit by public borrowing. Since government bonds are considered to be safer, public lending is likely to shift in that direction.

Such huge public borrowing by the government is likely to lead to scarcity of money for private investment. This crowding out of the private sector from the borrowing space adversely affects investment.  If an increase in government borrowing has a large effect on interest rates, private spending will fall as investors slim down their plans. Therefore, overall spending will not increase much.






Bills of exchange or other securities having a stated date for redemption (repayment) of their nominal value. Also called gilt-edged securities due to the extremly high safety of repayment with interestt. For instance, 10-Year Government of India bonds. Short-dated securities are those for which the redemption date is near; long-dated securities are those for which it is a long time ahead.




Using borrowing to finance excess of expenditure over income. Mostly, it refers to governments which often spend more than they can raise in taxes. The term is normally used to refer to a planned budget deficit incurred in the interests of expanding aggregate demand by relaxing fiscal policy and thus injecting purchasing power into the economy.





A sustained fall in the general price levels. Deflation is often accompanied by declines in output and employment and is distinct from ‘disinflalion' which refers to a reduction in the rate of inflation. Deflation can be brought about by either internal or external forces in an open economy.

The most obvious policy response to a deflation is to stimulate spending so that the prices stop falling and the economy stabilizes. Unfortunately, a big problem with deflation is that the normal policy tool of increasing spending and borrowing — lower interest rates — may be ineffective. If there is a deflation of 3 per cent, and if interest rates fall to zero, the real interest rate is still 3 per cent. This may not be low enough to promote spending and borrowing. Or, to put it otherwise, consumers tend to postpone spending as long as they think that prices will fall further.




A possibility that several nations could face a crisis in the near future decades, caused by ageing populations. Increased life expectancy and a declining birth rate, coupled with earlier retirement, have produced led a rising proportion of the old in the population. The trend is evident in many advanced countries, e.g. the European Union and Japan. The problem has prompted the suggestion that pensions should be provided on a funded basis rather than on a pay-as-you-go basis.




A severe fall, for more than the two successive quarters, in Gross Domestic Product, which defines a recession. The most serious was the Great Depression in the 1930s which saw major declines in output, prices, investment and international trade and the collapse of financial institutions. There was a loss of employment so that  the US unemployment rate rose to 26 % among industrial workers as Gross Domestic Product fell by 30 %. Prices and international trade collapsed by over 20 per cent, particularly affecting developing countries relying on exports of primary products, prices of which in Latin America fell by half.




De-materialisation of shares. Earlier, the share certificates in India used to be in material form, i.e. on paper. Now this system has been changed and has been replaced by paperless transactions in shares.

For this purpose, the National Securities Depository Limited and the Central Share Depository Ltd. have been set up to act as central repositories of all share transactions in the country. Under this system, every shareholder will open an account with NSDL or CSDL and will be given a distinctive account number. If he is allotted some shares by a company in an IPO, they will be credited to his account. The same thing will happen if those shares are transferred by someone else to that person’s name. So under this system, all paperwork has been abolished. Such a system ensures more efficiency, fewer delays and reduced losses in share transactions.






The process of reducing the burden of government controls in an economic sector generally focusing on those that can create entry barriers. The goal is generally to promote competition in areas considered to be natural monopolies, or in areas in which regulation has no logic left. Deregulation is distinct from privatization which, especially in the case of the natural monopolies, has to be followed by new regulation. Deregulation, in a variety of forms, has affected a substantial area of economic life in much of the developed world.



The reduction of the fixed official rate at which one currency is exchanged for another in a fixed exchange rate regime. Currencies were in such a regime for much of the second half of the 20th century under the Bretton Woods conference arrangements.  Apart from such general schemes, individual countries may opt to fix their currency's exchange rate.


There are three basic situations which lead to devaluation:


(a) persistent balance of payments deficit

(b) high inflation; and

(c) diversion between the economic activity of the country and the other members of the fixed rate region.


In (a) and (b), the devaluation helps the export economy at the expense of the non-tradable sector. For example, it works to reduce a deficit, because devaluation makes prices (in foreign currencies) of exports cheaper and the domestic price of imports costlier.



India had devalued its currency in 1991 bowing to the IMF pressure, after which its exports have risen significantly on a susutained basis to the tune of 20% year-on-year in dollar terms. Such devalualtion had been done in 1948 and 1966 also in response to exceptional economic situations.






Countries which have not achieved a level of economic development comparable to that of the most advanced or developed countries. There is no specific definition of such a country and an individual country can to define itself so, subject only to the approval of other World Trade Organization members (WTO). On the other hand, there are more specific criteria for membership of the 'least developed' group. To become a member, a country must have a Gross Domestic Product (GDP) per head below a specific level and must leave the group when its GDP per head passes a specific upper limit.


Membership of these groups entitles member countries to benefit from some relaxation in the terms of any WTO international agreements. For instance, an extension of the period of transition for the implementation of internationally agreed import tariff reductions.




The psychological law that as the extra units of a commodity are consumed by an individual, the satisfaction got from each unit will fall. For example, although for every extra chocolate bar someone eats, he derives extra pleasure but as more chocolates are eaten, lesser pleasure is gained from each incremental one. Eventually, sickness strikes, and the subsequent chocolate bars will yield disutility.



As additional units of a factor of production are employed, others being constant, the output of each additional unit will eventually fall. In effect, the marginal product of factors declines when they are employed in increasing quantities. For example, a farm owner with one field might find that one man could produce 2 tons of grain; two men 5 tons of grain — more than twice as much — but three men only 7 tons of grain. The extra production gained from adding a worker started at 2, rose to 3, and then fell back to 2.



Diminishing returns should be clearly distinguished from with negative returns. Successively adding workers to a factory can increase its total output but only at a falling rate; only when the factory becomes very overcrowded would the presence of an extra worker actually make the production fall.




Taxation on the income and resources of individuals or organizations. More technically, direct taxes are paid by the entity on which it is levied i.e. the tax burden cannot be passed on or transferred to any third party. For instance, Income Tax, Wealth Tax and Capital Gains Tax. In general, direct taxation is levied on wealth or income and is in contrast to indirect taxation - value added tax, excise duties, sales tax which is levied on expenditure.





A situation in which more people are available for work than is shown in the unemployment statistics. It can also be used in cases wherein people seem to be employed in an economic ativity but their contribution to productivity is either zero or negative.


Married women, some students or prematurely retired persons may decide to register for work only if they believe opportunities are available to them. Disguised unemployment will be revealed in an unusually low participation rate.




The reduction or elimination of inflation in an economy.




Negative investment which occurs when the capital stock is partly or wholly sold off or where gross investment is less than capital consumption, i.e. capital equipment is not replaced as it wears out. The Indian government had launched an ambitious disinvestment programme as part of the 1991 economic reforms to sell the shares of Public Sector Units and thereby dilute the government equity in them. Though the programme has met with a degree of success, much more is yet to be done.



Total household income minus income tax and other legal liabilities.




The liquidation or sale of parts of a firm. Divestment is, in effect, the opposite of acquisition or merger.




The situation in which the same tax base is taxed more than once. Double-taxation agreements between two countries are designed to avoid, for example, incomes of non-residents being taxed both in the country of residence and in their country of origin. Many proponents of an expenditure tax argue that its main advantage is to avoid double taxation of savings.





The sale of a commodity in a foreign market at a price below its cost. An exporting country may support such an activity the short-term losses to kill competition and thereby gain a monopoly in the market. Alternatively, it may dump to dispose of temporary surplus to avoid a fall in domestic prices and therefore producers’ incomes.

The global trade regulations developed under the General Agreement on Tariffs and Trade (GATT) and World Trade Organization (WTO), approve the imposition of special import duties (anti-dumping duties) to counteract it if dumping is taking place and is harming a domestic industry. Under WTO regulations, if products are sold in a foreign market below the price at which they are sold back home, dumping is deemed to take place.


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